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Buy Iron Ore Miners as Prices Set to Rebound: Pros

The slumping iron ore price is providing the perfect opportunity to build up positions in Australia’s top iron ore producers, experts tell CNBC.

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Iron ore has suffered a sharp fallin the past month, reflecting the weaker growth environment in China and the developed world. The benchmark ore with 62 percent iron content has fallen around 25 percent since the start of August to below $90 per metric ton. This is the lowest level for the commodity since December 2009.

But analysts expect to see a recovery in the bulk commodity as soon as the fourth quarter of this year.

“The speed at which the iron ore price has fallen in the past few weeks has been precipitous to say the least. But when (the price) comes off that quickly, historically it tends to recover quite quickly as well”, Simon Burge, CIO of ATI Asset Management told CNBC on Monday.

“We feel that the price of iron ore will recover in 4Q12 and Atlas Iron, Fortescue Metals and Rio Tinto will be the beneficiaries of the recovery”, Burge added.

The bullish view comes despite further signs of economic weakness in China, which consumes the bulk of Australia’s commodities.

Official Chinese PMI dataand HSBC’s private gauge indicated that the country’s manufacturing contracted in August, sending Shanghai steel futures lower on Monday.

Still, Jeremy Friesen, Commodity Strategist at Societe Generale says he is confident things are looking up for the sector.

“In China there’s a big pipeline of projects. It will just take Beijing to slowly ease conditions, which they will sometime in Q4 or before Q4. And we should see a turn that will help base metals and should help iron ore as well.”

From a historical perspective, some analysts say production cutbacks in response to falling iron ore prices will eventually provide the trigger to support prices.

“We await significant Chinese production being shut down and restocking of ore by Chinese steel mills,” Patersons Securities’ Head of Research, Alex Passmore told clients in a research note published today.

He adds that many of China’s domestic iron ore mines are uneconomic with iron ore prices less than $110 per metric ton resulting in closures, a shortfall in supply and a subsequent return to a natural level of price support.

Passmore says that he is retaining the formal BUY recommendations on Australia’s pure-play producers Fortescue Metals, Atlas Iron and Mount Gibson Iron, but warns about big earnings downgrades for FY13 and FY14 of between 55 and 96 percent, on the back of the fall in market expectations for the iron ore price, and the threat it poses to the producers’ margins.

But providing less sanguine views is Tom Price, Global Commodity Analyst at UBS, who believes seasonal factors will continue to depress prices for the next several weeks.

“I think the natural low in the iron ore trade doesn’t usually occur until October, so we’ve potentially got another four to six weeks of pain,” he told CNBC.

Price adds that a traditional lift in steel inventories in October means that iron ore prices are vulnerable to hitting an annual low during the month.

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